Mergers and Takeovers 3.2.2 Flashcards
What is a merger?
When two or more companies combine to form a new company
What is a takeover?
When one company purchases another company, often against its will
Reasons for mergers and takeovers
-Strategic fit - a company may acquire another company to expand into new markets, diversify its offerings or gain access to new technology
- Economies of scale - allows companies to reduce costs and increase efficiency
-Synergies - result of the combination of companies, such as increased revenue, cost savings or improved product offerings
-Eliminate competition - acquiring another company increases it market share
-Shareholder value - benefit from increased profits, dividends and stock prices
Vertical integration (forward)
Involves a merger or takeover with a firm further forward in the supply chain
Vertical integration (backward)
Involves a merger or takeover with a firm further backwards in the supply chain
Horizontal integration
A merger/takeover of a firm at the same stage of the production process
Advantages of vertical integration
- reduces the cost of production as middleman profits eliminated
- lower costs make firm more competitive
- greater control over the supply chain reduces risk
- quality of raw materials can be controlled
- additional profit form forward integration
Disadvantages of vertical integration
- diseconomies of scale can occur as costs increase
-culture clash between two merged firms
-possible little expertise in running new firm results in inefficiencies
-price paid for new frim may take a long time to recoup
Advantages of horizontal integration
-rapid increase in market share
-economies of scale
-reduce competition
- existing knowledge of the industry means mergers are more likely to be successful
-may gain new knowledge or expertise
Disadvantages of horizontal integration
-diseconomies of scale may occur
-culture clash between two merged firms
Financial risks of mergers/takeovers
-Overpayment - if acquiring company pays too much for target company, it may not be able to recoup investment
-Integration challenges - can be complex and costly with potential disruptions
-Cultural differences - mergers can result in clashes of company culture leading to decreased productivity and loss of valuable employees
-Regulatory hurdles - opposition from regulators or other stakeholders
-Debt - acquiring companies may take on debt to finance merger
Financial rewards of mergers/takeovers
-Increase market share - acquiring another company may lead to increased sales revenue and profitability
-Synergy - cost savings through elimination of duplicate functions and increased efficiency
-Diversification - selling wider variety of goods reduces risks associated with selling single product
-Access to new markets - if acquired company has strong presence in a new market may result in larger customer base and sales revenue
-Increased value - increase overall value for shareholders
Problems of rapid growth
-Strain on cashflow - may require new equipment or staff to support growth causing financial strain if revenue does not keep up with expenses
- Quality - product and customer service quality may deteriorate as existing systems strained
-Diseconomies of scale - cost per unit may increase as a result of cultural and communication diseconomies
-Increased management complexities - managers may be overloaded with new responsibilities
